Keppel DC REIT - Lifted By Acquisitions And More To Come

The Positives

Portfolio WALE remains long at 9.1 years, albeit marginally lower QoQ from 9.2 years.

Aggregate leverage remains unchanged QoQ at 32.1%, affording a debt headroom of ~$210mn (based on the manager’s internal cap of 40% gearing). Weighted average debt maturity has been extended to 3.8 years from 2.5 years in 3Q17; and no debt maturing in 2018.

The Negatives

QoQ lower portfolio occupancy from 93.4% to 92.6%. This is due to lower occupancy at KDC SGP 1 and KDC DUB 1. Portfolio WALE is also marginally lower QoQ from 9.2 years to 9.1 years.

Key tenant renewed at -4.5% reversion. This was for a key client in Gore Hill, who takes up multiple spaces within the portfolio. The tenant took up more space in this renewal and was given a bulk discount. No annual step-up embedded in the lease.

Outlook

The outlook is stable to positive. Income visibility due to negligible renewal risk with only 2.2% and 2.3% of leased area for renewal in 2018 and 2019. The next debt maturity is in 2019, thus avoiding impact from any interest rate hikes in 2018.

The low gearing and available debt headroom are favourable for growing the portfolio inorganically.

The investment properties are currently valued at $1.54bn, and the manager is working towards achieving the $2bn AUM target in 2018.

Maintain Neutral, higher target price of $1.47 (previously $1.36)

We expect higher revenue and DPU in FY18e on the back of full year contribution from KDC DUB 2 (acquired in September 2017) and partial contribution from maincubes Data Centre (expected from 2Q18 onwards).

We have factored in issuance of new units to partially fund the acquisition of maincubes Data Centre.

We like the growth story for the stock, but opine that valuation appears to be rich at an implied 1.45 times FY18e P/NAV multiple.

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